The Support of European Stocks is Key for the U.S.

Most of the selling in developed markets has been concentrated in the Eurozone. There are signs of economic weakness, deflation, and proximity to Russia and Ukraine, which have put stocks in this region under pressure. Weakness there has resulted in weakness in the U.S. The EMU Index iShares (EZU) is trading at the lowest level in six months and well below its 200-day average. The 14-day RSI shows it in a short-term oversold condition. The EZU is also nearing a test of important support along its first quarter. It’s important that the EZU stay above that support line for Europe to gain a foot hold and hold support for the U.S.

The heavy selling in the iBoxx High Yield Corporate Bond iShares (HYG) seems to have abated. High yield bonds and the stock market are highly correlated. The HYG has fallen sharply throughout July. However, the HYG is in the process of testing its 200-day average. Its 14-day RSI is also oversold. A bounce in the HYG could relieve some short-term pressure in stocks.

The Dow Industrials have already reached their 200-day moving average. At the same time, the 14-day RSI line has reached a short-term oversold reading at 30. This is an important test for the Dow and the rest of the market. The Russell 2000 Small Cap Index ($RUT) is trying to stabilize just above its May low. Relative weakness in small caps has been one of the factors leading to the recent selloff. At the moment, the RUT is in a trading range between its 2014 highs and lows. It’s very important that it stay above its May low. Otherwise, things could start looking a whole lot weaker.

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